Latvia Property Prospects Mixed for 2007

To say that opinions relating to Latvia’s property prospects for 2007 are mixed is putting it mildly.  The division of opinion relating to Latvian property as an economic sector and the likely path its fortunes will follow in 2007 is so sharp and so dramatic that we have decided to present you with both sides of the argument for you to make a decision about the country and its viability for your own portfolio.

On the one hand we have just received word from Knight Frank that property prices in Latvia in the third quarter 2006 rose by a staggering 39.2% and on the other hand we have economists warning that the success of Latvia’s property market and the positive GDP growth figures it is recording are drawing the government’s attention away from a very real need to establish an environment conducive of sustainable growth in Latvia, and that this could bring about economic overheating and inflation spiralling out of control.

Positive Prospects for Property in Latvia in 2007

In reality Latvia’s government are doing all they can to attract sustained international foreign direct investment and to promote and develop the nation’s now vibrant financial sector, they are determined to bring wages up in line with the EU average and more importantly, to improve their citizens’ living standards and to that end they are supportive and positive about the speed and rate of growth evident in Latvia right now.

Latvia has a booming banking and financial sector in Riga and across the country it has 4 free trade zones designed to promote investment and attract long term business commitment.

According to the Latvian Statistics Bureau, third quarter GDP growth hit 11.9% in 2006 compared to the previous year’s figures with construction the second most important sector delivering economic activity.  Construction is so far not keeping pace with demand in a number of locations in Latvia which is why in the same quarter Knight Frank’s experts recorded property price appreciation of 39.2%.  Driving the demand is largely a local desire for property for sale which is being paid for by currently affordable and easily accessible mortgage finance.

Certain factors exist to suggest that over the medium term property prices can continue to rise in Latvia because economic growth if forecast to exceed the EU average for a number of years while Latvia catches up with its Western EU counterparts.  To that end continued wage inflation will result in a more affluent society able to consider home ownership which they can then achieve with easier access to simpler home financing structures that are becoming more readily available in Latvia all the time.
For an investor the local professional marketplace is worth consideration as a target market for buy to lets as well as flipped new units and the resale of well renovated properties…in Riga property prices have already been spiralling and it can be harder to make substantial profits so why not consider commercial or residential property in Ventspils, Liepaja or Rezekne where there are attractive free trade zones offering companies establishing there incentives such as 80 or 100% rebate on real estate tax, VAT at 0% on many goods and services supplied within the free zone such and VAT, excise tax and customs duty exemptions on imports into the free zones.

Negative Prospects for Property in Latvia in 2007

There is a global economic trend that seems to be gaining pace going in to 2007 and that is for a general slowdown in real estate market expansion.  This and a number of other factors could see the rate of growth in Latvia slow substantially towards the end of next year and as a worst case scenario property in Latvia could follow in the footsteps of property economies in Hungary, Portugal, Japan, Hong Kong and Germany where there was negative economic growth recorded in the third quarter 2006.

Where Latvia has undoubtedly benefited hugely from its country’s accession to the EU in 2004 and from the resultant inward flow of international business seeking affordable operations centres offering taxation incentives and a lower cost workforce, it is in danger of alienating this business commitment in the medium term if it does not take efforts to slow inflation. 

We have economists warning that Latvia’s government should not be in such a hurry to raise wages and living standards to those of Western EU members because this will actually reduce the competitive edge that it offers currently and see foreign investment slip away, and we have the European Central Bank stating categorically that high inflation is the key reason behind the decision to slow down Latvia’s adoption of the Euro.

In 2006 in Latvia wage growth began outpacing productivity and this divergent trend is actually a long term negative factor for sustainable growth – however Latvia’s government are seemingly unwilling to accept this nor accept that fast paced inflation expansion could damage the market and cause it to overheat…instead they seem to be chasing GDP growth at all costs. 

The one market sector clearly affected more than all others by this spiralling growth, (that some say is spiralling out of control), is real estate.  More consumers are taking on more loans, buying more property and then continuing to spend.  Analysts have suggested the government taxes capital gains made from real estate to slow speculation and to slow the overall speed at which property is growing in a bid to slow the entire economy down – a good idea if the government wanted to slow the economy down but they don’t!

So, where does all this leave property investors?

Latvia’s property prospects are most certainly mixed for 2007 and there is weight behind each argument to support it making it even more confusing.  We believe that there will still be short term gains to be made in Latvia before an economic adjustment takes place affecting the real estate marketplace possibly as early as winter 2007.  Looking to the long term however, because the overall prospects for property in Latvia are dependent on the local workforce, while there are good employment prospects in Latvia and the Latvian government remains committed to raising sustainable inward foreign direct investment and building a solid economy there will be a property market with room for capital growth and decent rental yields in Latvia.

Special Reports: Property News for Latvia

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